This has been a pretty brutal week for the market, and as a result for some of the profits that have been taking in, in both the papermoney and my real trading accounts. I took some time last night to review the market data, and then during the day today I was able to find a couple of candidates that will help to offset some of the trading losses experienced yesterday while still providing a managable risk profile.

Before I outline these new trades, I’m going to take a moment to discuss my thought process in these new trades, why I closed yesterday and what the plan is going forward. First lets start with a re-cap of the week and what led us to this situation. On Friday the 2nd of June I was out looking to see if there was any more relatively low risk money that could be captured. I found a very nice looking trade on the Russell 2000, by rolling up existing June Verticals we could capture the existing profits and then add a little more into our pockets.

Upon initial examination, the calculated risk on Friday the 2nd for the Russell 2000 to settle below 700 at expiration was 6.84% (Today it is over 23%). I found a reasonable trade that could be posted rolling the existing Put Verticals to a new 700/690 Vertical and was able to capture a pretty decent premium in both the papermoney and my trading account. As a result, the trades were made an off we went. On Monday June 5th the markets opened down, and for the most part things were going fine, then just a about an hour after the open the Russell simply tanked! It dropped about 20 points on Monday after hawkish comments from the Federal Reserve Chairman Ben Bernanke—It’s not Ben’s fault that the market dropped, he just happened to assist in the acceleration of the sell off.

On Tuesday, the markets opened with modest gains and then quickly sold off and the Russell went as low as the 703 level. At that point, the market was moving downward rapidly and it didn’t look like things were slowing down. As I have said many times on the site, a lot of how you manage your portfolio deals with risk management. Generally speaking, I manage my risk for Iron Condors and Verticals using a pretty simple set of rules. On Tuesday the Russell violated my less than 2 weeks left rule. As a result, it was time to make a hard decision, do I stay or do I go? I chose to follow my rules, take the rest of the margin risk off the table and swallow a loss for the month of June.

There are a lot of similarities to this sort of a situation and a hard fold in Texas hold ‘em. In hold’em you don’t know what your opponent has, and based upon their most recent actions you have to make a decision; you quickly calculate the odds, then make your move. Sometimes, your right and you fold a losing hand, saving your chips and living to play another day. Then again, sometimes you are wrong and you get bluffed out of your money. The same thing is happening here. I could be right, the market may continue to move down and breach the 700 level at setlement, if that happens then we made a good fold, if it doesn’t then in hind sight it wasn’t a great move – but at the time it is the only decision that I can see making given the information that was available.

After making the play and closing both Russell positions, one in the papermoney account and the other in my personal trading account, I took the rest of the day to work on other things, let my mind clear and then re-evaluate where things were. After looking at the market data and running the numbers again, I did find a couple of candidates for the last few days in June that can still yield some profits. Let me be clear… I do not plan on trying to get it all back this month. Most of the time that will simply crush you and your trading account. I’ve tried that, and failed many times in the past.

The goal here is to begin the process of recouping your losses and continuing to make solid profits in the market. In order to be successful, I personally believe that you must approach trading just like a business. A loss is an expense, an unplanned expense but an expense none the less. You must treat it as such, it is sunk, done, gone, you can’t get it back. The goal going forward is to simply continue to make money in your business. If you can take the emotion out of it, you will be much more successfully as the days and months go by.

So… with that in mind I’m going to venture back into the world of the RUT and put on another June position. I have sold another Vertical Put Spread, very similar to the one that was just closed, only 20 points lower. I think this new level accurately adjusts for the hawkish comments made by the fed chief on Monday, and sits well below recent historical support levels for the RUT. I have also placed a top on my MSH Vertical creating an Iron Condor, this is also a lower risk move based upon the recent activity of the MSH. Here are the breakdowns on the trades:

• Sold RUT 680/670 Vertical Put Spread
• Sell 680 Put & Buy 670 Put
• Filled for $0.75 Credit
• ROI: 7.5%
• Risk 11.8%
• Recent support levels are at 700. This provides a nice 30 point or so cushion over a one and a half week period. I could have moved this position up to the 690 range, but after just being burned I’m going to play it a bit more carefully, feel free to adjust up if your risk profile allows for it.

• Sold MSH 520/530 Vertical Call Spread
• Sell 520 Call & Buy 530 Call
• Filled for $0.40 Credit
• ROI: 4%
• Risk: 7.31%
• The MSH looks like it has found resistance at about the 510 level in recent weeks. This position will provide a 25 point cushion for upside movement on the MSH. As with the RUT position above, I’m making sure that the risk numbers justify the sale. I think in this case the credit taken in is worth the 7.31% chance of the MSH breaching the 520 mark.

After Closing Commentary

After the market closed today, each of the positions I put on look even better. The Russell did move down today, but only moderately compared to recent losses, and the MSH moved down 4.51 points adding to the large cushion at the time of purchase. The movements in the Russell appear to be forming a bottom, but will need confirmation in the coming days. Volume remains very light, and it looks like we will have to wait until next week to get any further information on what the Fed might do. Of course, time is working in our favor right now. Ideally, the market will continue to chop for the next few days, and sometime early next week I will be able to begin the process of unraveling June positions, then going to cash for a few day until the feed meeting later in June.

I will of course be looking for other July positions once I am able to close out June with some modest gains after the bath we took on Tuesday; however I remain very cautious until there is better direction on the Feds movements. It might be interesting to play a momentum game with a straddle or two near the fed meeting. I’ll have to look into that as well… until then, grab my feed and good luck!

Categories: Options Trading